The Assistant Secretary for Financial Stability, Neel Kashkari, gave a speech that was a comprehensive update on the Treasury Department’s progress in implementing the Troubled Asset Relief Program (TARP). The speech was given at Brookings Institution on January 8, 2009. The following is excerpts from the speech discussing the Fed and Treasury programs in place. The discussion highlights the funds disbursement, progress and goals. The following statements are all directly from Mr. Kashkari.
We at Treasury have responded quickly to adapt to events on the ground. Throughout the crisis, we have always acted with the following critical objectives in mind: one, to stabilize financial markets and reduce systemic risk; two, to support the housing market by avoiding preventable foreclosures and supporting mortgage finance; and three, to protect taxpayers. The authorities and flexibility granted to us by Congress have been essential to developing the programs necessary to meet these objectives.
A program as large and complex as the TARP would normally take many months or years to establish. But, we did not have the luxury of first building the operation, then designing our programs and then executing them. Given the severity of the financial crisis, we had to build the Office of Financial Stability, design our programs, and execute them – all at the same time. We have made remarkable progress since the President signed the law only 97 days ago.
Today, I will brief you about five areas. First, I will give an update on execution of the programs Treasury has implemented under the TARP. Second, I will review the progress we’ve made in building the Office of Financial Stability. Third, I will provide an update on our efforts to meet the highest standards for compliance and oversight. Fourth, I will review the thorough reporting requirements we continue to meet. Finally, I will update you on some of the measurements we look at to judge if our programs are working.
Update on TARP Programs
I will begin with the Capital Purchase Program (CPP). On October 14, Secretary Paulson announced that we would allocate $250 billion of the financial rescue package for a voluntary capital purchase program for healthy, viable banks of all sizes. The CPP was designed to first stabilize the financial system by increasing the capital in our banks, and then to restore confidence so credit could flow to our consumers and businesses.
People often ask: why are we investing in healthy banks? Shouldn’t the TARP be used for failing banks? Healthy banks are in the best position to support their communities by extending credit. A dollar invested in a healthy bank is far more likely to be used to promote lending to creditworthy borrowers than a dollar invested in a failing bank, which would more likely use it to stay afloat.
It has been 86 days since Secretary Paulson announced the Capital Purchase Program. We started from scratch, recruited and built a world class team, designed the program details, hired necessary outside vendors, and implemented a complex, but efficient processing model. In that time, we have invested $178 billion in 214 institutions in 41 states across the country, as well as Puerto Rico.
There is a huge demand for the program: the number of applications under-review at the regulators is in the thousands, representing every state in the country, and hundreds more have already been pre-approved by Treasury. We are pleased with the large number of banks that have applied. The regulators are working diligently to get through their review and forward recommended applications to us as quickly as they can. We expect their review to continue over the next few months.
We continue to process applications quickly but carefully to ensure our program guidelines and goals are met. In fact, we find that institutions need more time to complete their legal requirements than Treasury needs to execute the investments.
Our work will not let up until the last application has been reviewed and processed. Completing investments in more than 200 institutions across the nation in less than 90 days is a feat that I believe is unmatched in the public or private sectors. This progress is remarkable not only in its speed and quality, but also in its scope. We have reviewed applications from every state in the nation and touched almost every banking market with applications from small and large banks alike, including Community Development Financial Institutions. The largest investment under the CPP has been $25 billion and the smallest less than $2 million, with applications for upcoming investments of a few hundred thousand dollars.
Automotive Industry Financing Program
Next, I will discuss Treasury’s actions under TARP to support the auto sector. While the TARP was designed to stabilize the financial sector, the legislation provided sufficiently broad authority to act to stabilize the domestic automotive industry. Absent congressional action, no other authority existed within the federal government to stave off a disorderly bankruptcy of one or more auto companies. Treasury was forced to act to prevent a significant disruption of the automotive industry that would pose a systemic risk to financial markets and negatively affect the real economy.
Last week, Treasury began funding transactions under this program. We funded our full commitment of a $4 billion loan to Chrysler, and we funded the first $4 billion of a $13.4 billion commitment to GM – the last $4 billion of which depends on future congressional action. The terms of these loans require the companies to move quickly to develop plans demonstrating long-term viability, and they also include significant taxpayer protection provisions.
Because the finance companies serve as the lifeblood of the automakers, we knew that our program would need to address the short-term needs of the auto finance companies as well. Last week, we funded a $5 billion investment in GMAC. We also committed to an additional $1 billion loan to GM to be used to participate in a rights offering at GMAC as part of its recapitalization in becoming a bank holding company.
These financings were designed to use our limited remaining resources to address the participating companies’ short-term needs while providing them enough time to begin the hard work with all stakeholders that will be necessary to achieve viability.
Term Asset-Backed Securities Lending Facility
Support of the consumer finance sector is a high priority for Treasury because of its fundamental role in fueling economic growth. Like other forms of credit, affordable consumer credit depends on ready access to a liquid and affordable secondary market – in this case, the asset-backed credit market.
The Federal Reserve is setting-up a $200 billion program to support consumer finance securitization markets, specifically credit cards, auto loans, student loans and small business loans. Under the TARP, Treasury will provide $20 billion in this facility, which will enable a broad range of institutions to step up their lending and enable borrowers to have access to lower-cost consumer finance and small business loans. The facility may be expanded over time and eligible asset classes may be expanded later to include other assets, such as commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes. Treasury and the Federal Reserve continue to make progress in establishing this facility, which we expect to become operational in February.
Asset Guarantee Program
We established the Asset Guarantee Program under section 102 of the EESA. This program provides guarantees for assets held by systemically significant financial institutions that face a risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets. Treasury is exploring use of this program to address the $5 billion guarantee provisions of our recent agreement with Citigroup.
Targeted Investment Program
As part of our recent $20 billion investment in Citigroup, Treasury also established the Targeted Investment Program, the objective of which is to foster financial market stability. In an environment of high volatility and severe financial market strains, the loss of confidence in a major financial institution could result in significant market disruptions that threaten the financial strength of similar institutions. This investment in Citigroup includes important restrictions on executive compensation and corporate expenses as well as provisions to protect the taxpayers.
Reporting and Transparency
Treasury has met all of our reporting requirements on time, and will continue to do so. All of our reports are posted on the Treasury website.
First, the law requires Treasury to publish a Transaction Report within two business days of completing each TARP transaction. We have published eleven transaction reports so far.
Second, the law requires Treasury to publish a Tranche Report to Congress within seven days of each $50 billion commitment that is made. To date, Treasury has published four Tranche Reports, including one this week.
Finally, the law requires Treasury to provide a detailed report on the overall program within 60 days of the first exercise of the TARP purchase authority and then monthly thereafter. We have published two such reports so far, the most recent this week.
Measuring Results
The most important evidence that our strategy is working is that we have stemmed a series of financial institution failures. The financial system is fundamentally more stable than it was when Congress passed the legislation. While it is difficult to isolate one program’s effects given policymakers’ numerous actions, one indicator that points to reduced risk of default among financial institutions is the average credit default swap spread for the eight largest U.S. banks, which has declined by about 275 basis points since before Congress passed the EESA. Another key indicator of perceived risk is the spread between LIBOR and OIS: 1-month and 3-month LIBOR-OIS spreads have declined about 202 and 147 basis points, respectively, since the law was signed and about 312 and 242 basis points, respectively, from their peak levels before the CPP was announced.
People also ask: when will we see banks making new loans? It is important to note that almost $75 of the $250 billion CPP has yet to be received by the banks. Treasury is executing at a rapid speed, but it will take some time to review and fund all the remaining applications. This capital needs to get into the system before it can have the desired effect. In addition, we are still at a point of low confidence – both due to the financial crisis and the economic downturn. As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, Treasury expects to see more credit extended.
The increased lending that is vital to our economy will not materialize as fast as any of us would like, but it will happen much faster as a result of deploying resources from the TARP to stabilize the system and increase capital in our banks.
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